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Global investment banks are preparing to slash hundreds of Australian jobs and take the knife to coveted banker bonuses as the industry braces for its worst year since the financial crisis.

Heavyweights including Morgan Stanley, Deutsche Bank and Bank of America Merrill Lynch have started dumping local staff as they pay the price for recent hiring sprees in an overcrowded banking market that has failed to fire as anticipated.

Investment bankers in Australia are expected to be dealt cuts of 30 per cent to 40 per cent in their annual bonuses in coming weeks, industry sources and recruiters say.

The worst-case scenario for many is a zero bonus, known in the industry as the “doughnut”.

“Management are talking ugly – we are expecting the worst,” said one insider at Citigroup before the release of the bank’s fourth-quarter earnings overnight.

US banks are expected to report dismal earnings results this week as trading volumes fall. Morgan Stanley plans to cap upfront cash bonuses at $US125,000 this year, according to US media reports yesterday. Banks face growing political pressure to curb pay.

The industry cranked up local staff numbers after the global financial crisis. In some cases, entire advisory and research teams were poached as recruits were offered generous sign-on fees and guaranteed bonuses.

However, a sharp drop in capital raisings and a lacklustre demand for stockmarket floats has eroded volumes despite relatively strong mergers and acquisitions activity compared with the rest of the world.

“It is a challenging space and Australia continues to be an over-banked market and there will certainly be challenges, for instance, very low levels of ECM [equity capital markets] activity,” said Simon Mordant, co-chief executive of independent adviser Greenhill Caliburn.

“A number of banks recruited aggressively in the prior 18 months and didn’t see supporting revenue.”

While Greenhill Caliburn said it would continue to recruit at a senior and junior level, it is a different story for big US and European banks with operations in Australia.

The jobs of more than 400 Royal Bank of Scotland staff are in doubt as the British bank tries to find a buyer for some of its local operations after unveiling plans last week to lose 3500 staff globally.

Deutsche Bank is understood to have cut 10 Australian jobs last week and made another nine people redundant in its corporate finance unit on Monday with more expected to ­follow, while Morgan Stanley has axed seven analyst and institutional broking jobs this year.

Bank of America Merrill Lynch is understood to have sacked five senior staff over the past week. The bank is reportedly planning staff cuts across investment banking and capital markets in the Asia-Pacific region by up to 25 per cent.

Bonuses, the holy grail for investment bankers, which are sometimes multimillion-dollar supplements to base salaries as compensation for working excessively long hours, are also under threat.

Morgan Stanley reportedly plans to increase the average amount of pay deferred to about 75 per cent of bonuses, although the amount deferred for junior staff would not exceed 25 per cent, the reports said.

UBS, which posts fourth-quarter results on February 7, is expected to inform staff about bonus payments in mid-February. There is a question mark over whether a 2009 deal to ring-fence the Australian bonus pool at UBS will be renewed.

Banks were also looking at other ways to reduce staff costs, including the possibility of slashing base salaries, according to industry recruiters. This applied particularly to US firms grappling with the appreciation of the Australian dollar.

“It means bankers down here are being paid an awful lot more on the base than they are elsewhere in the world,” said Victoria Biggs, of executive search firm Platinum Pacific Partners.

“The rumour is there might be a correction of that come this bonus round, and a new base salary round.

“What I’ve heard might happen at one institution is that when they go to allocate bonuses, they will get people to sign new contracts that will see a decrease in the base salary, something akin to pre-GFC levels.”

The worst-case scenario for some is no bonus altogether, according to one head of equities at a major bank.

“There will be huge differentials,” he said. If you aren’t a high performer, you are at a real risk of getting zero.”

Macquarie Group calculates its bonuses as a share of profit but doesn’t pay until after reporting its full-year results in April.